Good day, ladies and gentlemen, and welcome to the AOL Q3 2011 Earnings Conference Call. My name is Tawanda and I will be your coordinator for today. (Operator instructions.) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to Mr. Eoin Ryan, Vice President of Investor Relations. Please proceed.

Eoin Ryan

Good morning. Thanks, Tawanda, and everyone for joining us for our Q3 2011 earnings call. You can find our Q3 earnings press release and accompanying slides and trending schedules on our website. On the call with me today is our Chairman and CEO Tim Armstrong, and our Chief Financial Officer and President of Paid Services Artie Minson. Tim and Artie will make some brief remarks on the quarter and on our overall strategy and then we’ll open up the lines for Q&A.

First I will remind you that during this call we may discuss our outlook for future financial and operating performance, corporate strategy, marketing and product plans, technology improvements, cost initiatives, planned investments as well as our expectations for the economy and online advertising in general. These forward-looking statements typically are preceded by words such as “we will,” “we expect,” “we believe,” “we anticipate,” or similar statements. These forward-looking statements are subject to risks and uncertainties and our actual results could differ materially from the views expressed today and reported results could not be indicative of future performance. Some of these risks have been set forward in our quarterly report Form 10(q) for the three months ended September 30th, 2011, and in our annual report Form 10(k) for the year ended December 31st, 2010, filed with the SEC.

All the information discussed in this conference call is as of today, November 2nd, 2011. We do not intend and do not undertake any duty to update this information to reflect future events or circumstances. We will also discuss certain non-GAAP financial measures including adjusted OIBDA and free cash flow. I’ll refer you to the press release on the Investor Relations section of our website for all comparable GAAP measures and full reconciliations.

Finally, from time to time we post information about AOL on our Investor Relations website at www.ir.aol.com, and on our official corporate blog at www.blog.aol.com. And with that I’ll turn it over to Tim.

Tim Armstrong

Thanks, Eoin. Good morning and thanks to everyone joining us for today’s call. The trajectory of our results show a growing set of improvements from where we were just one year ago and a pattern of advertising growth. This reflects continued execution of our strategy directed at becoming the premier scale branded media and technology company for the web with great experiences for consumers and deep relationships with world-class brands and advertising agencies.

Here are the three things I would like you to take away from our Q3 results and this call. Number one, we are growing meaningfully as a company again. We are closing in on meaningful inflection points. The gap to total revenue growth is closing. Number two, we are focused on running AOL more efficiently. Costs declined sequentially in Q3. Number three, AOL has positioned its assets, people and strategy in front of a huge opportunity. We have repositioned the company, we have divested or closed non-core assets. We have made investments in key growth areas; we have taken short-term pain in our reported results but the benefits are now coming into view.

With our Q3 results we now have three quarters in a row of global display growth and two quarters in a row of global advertising revenue growth. The trend has clearly improved after our 2010 year of restructuring. Total revenue, which was down 27% a year ago in Q3 is down 6% this year, the lowest rate of decline in five years. Consumer usage of AOL’s products and services is up in the US and we have started to rescale our international platforms in key markets. Our Global Team has done an excellent job of methodically improving operations through significant cost reductions, simplifying our systems, restructuring international operations and continually improving our products and services.

There were some important proof points in our long-term strategy during the quarter. On the consumer side of the business, we are building scaled brands within our 80-80-80 focus: women, influencers and locals. We are building experiences that span PCs, tablets, mobile devices and plasma screens and we are experiencing growth in a number of important categories. Consumer usage of our properties grew across the web and mobile during Q3 including key growth in video, news, lifestyle, entertainment, technology, and local.

On the video front, viewers of AOL videos grew faster than any other member of the top ten video properties, up 70% year-over-year, and video views continue to grow at over 100% year-over-year. The Huffington Post platform allows us to launch new sections and expand into new markets in a very cost-effective manner. In Q3 we launched over 20 new sections, expanded into the UK and Canada and recently announced a partnership with Le Monde in France. The Huffington Post has grown rapidly since acquisition with over 35 million unique visitors monthly compared to 25 million at acquisition. The site is benefitting from strong organic growth and integration with AOL properties. Similarly, with page views, visits and time spent on properties, all of those have grown over 100% with acquisition. The site now receives over 15 million user comments per quarter.

With Patch we’re currently in 862 patches across the country. Patch surpassed 10 million users monthly and we now have 10,000 people blogging on the Patch platform across the country. The average patch is ten months old, and patches at six, twelve, and 18 months are all growing users very strongly. MapQuest remained number two in the mapping category in the US and we have the number one free navigation app in the iPhone app store. MapQuest also launched Neighbor Vibe, a site covering 50,000 neighborhoods in the US with data listings of the most popular destinations. AOL is number four in mobile in the US and during the quarter we launched a number of important mobile products including AOL Additions, InGadgets, [Dissero] and the Huffington Post smartphone site.

We are continuing to make progress on the consumer side and we are focused on innovation to grow consumer usage of our products and services. In advertising, AOL is an innovator in the online advertising space. We have attracted significant interest from industry partners and we continue to push the envelope in brand advertising. We are now enabling our ad products with social, mobile, and commerce features that will differentiate and improve the results advertisers can expect from us.

Here are some advertising highlights for the quarter: we saw a year-over-year growth in pricing, average deal size and total number of advertising deals. Revenue from the top agency holding companies grew year-over-year. We announced a partnership with Publicis’ VivaKi on the development of new video formats similar to the work we’ve done in display with Project Devil. Project Devil momentum continues. Quarter-over-quarter, customers, campaigns and revenue all grew by over 50%.

Our network continued to expand across the internet. Advertising.com grew the number of publishers, advertisers and sold campaigns by over 20% year-over-year. [FiveMen] grew the number of videos in their library and the number of advertisers and publishers that it works with. [BuildViral] continued the expansion of the publisher partnerships. In all, the Advertising.com group now has over 30,000 publishing partners.

Video revenue grew by 50% year-over-year and we more than doubled the number of advertisers running campaigns with AOL from Q2 to Q3. Our consumer usage is growing rapidly and we are now focused on appropriately connecting our advertising partners to those users. With Patch, advertiser interest is growing rapidly with over 5000 advertisers now advertising across our communities and we are seeing growth in the average deal size and length of the advertising contracts.

In Search, revenue declines are moderating and we grew search revenue on AOL.com by double digits. On the advertising systems side, our Technology Team delivered a number of important improvements including campaign management simplification, AdLearn 5.1, and we integrated mobile advertising functionality into our core ad system.

For 2012 we believe there are huge opportunities to serve advertisers’ digital media needs and we continue to operationalize internally around that. We have visited many customers over the last two months as they plan their budgets for next year and 100% of them are planning on moving more money from traditional media to digital media in 2012. AOL will play an important role in that shift for many of the Fortune 500 advertisers. Customers in the advertising field are looking for fewer partners and they’re moving their dollars upstream, and AOL with our scale sits at the center of that opportunity.

To close, AOL is intent on becoming the next great media company for the digital age and we have made significant progress, both operationally and financially, to that end. We will continue to simplify the structure of the company and we will be putting more resources against our most important brands. We announced after our last call that we will invest in our own equity and strategy and we were able to shrink the outstanding equity by approximately 9% since the last call, an investment that benefits our shareholders, employees, and the company as a whole.

With that I’m going to turn it over to Artie and I look forward to your questions. Artie?

Artie Minson

Thanks, Tim, and thanks everybody for joining us this morning. The headline for Q3 was that global advertising revenue grew 8% year-over-year, the second consecutive quarter of global advertising revenue growth. Net OIBDA grew sequentially and this is for the first time since 2008 driven by a sequential decline in non-taxed operating expenses. Our results today are relatively straightforward so let me jump right in.

Total revenue declined 6% in Q3, which is the lowest rate of decline in five years as our progress in global advertising revenue is beginning to significantly offset the already moderating declines in subscription and search revenue. As Tim noted, a year ago at this time our Q3 revenue had declined 27%. We are making progress towards the inflection point of total company revenue growth, and as I noted on the last call this will precede profit growth.

Turning to domestic display which grew 14% on a reported basis and 4% on a pro forma basis, which includes revenue from the Huffington Post, [FiveMen] and TechCrunch in both periods – this quarter’s display growth continues to reflect the benefits of processes we put in place last year to improve yield across all of our properties. On the last call we noted that we had seen weakness in ad sales in June which continued into July as pro forma domestic display was essentially flat year-over-year in those months. Into mid-August trends began to improve as we moved through the remainder of the quarter, with pro forma growth on a combined basis in August and September of approximately 6%.

The final point on global display: international display grew 28% year-over-year, which was the first time international display grew since 2008 as most of the international restructuring has now cycled through the numbers. This growth was principally driven by our Canadian team and we are very pleased with our progress there.

Turning to search and contextual: going into the quarter we had seen weaker trends with some softness in domestic CPCs in June, persisting into July. During the quarter, as was the case with display, we saw improvement in our search revenue trends as the quarter progressed, which resulted in a search and contextual revenue decline of 15% representing a meaningful improvement in sequential and year-over-year trends. That said, we are not seeing the CPC performance our partner Google has, and as I said on the last call we continue to have conversations with Google on the matter to improve our visibility into this item.

Peeling the onion a little on search, because there are a significant number of moving parts, the decline was driven primarily by lower revenue from co-branded portals and international markets, due to our exit last year from unprofitable distribution deals and markets. Co-branded and international revenue together represent approximately 25% of total search and contextual revenue and they are declining by about one-third this year. Search and contextual revenue declines also reflect the decline in search revenue from the AOL client, although those declines continue to moderate with lower contextual revenue reflecting our de-emphasis of that product last year. Declines were partially offset by growth in search revenue from the core AOL.com. In short here, we have seen good progress in the areas which we can control and obviously this has a positive impact on the bottom line.

Turning now to subscription services, which remained very solid with subscribers and RPU declining 15% and 3% respectively. Let me point out one item on the subscriber and RPU decline. During the quarter we simplified our subscription pricing structure by meaningfully reducing the number of price points offered for our services. As a result, approximately 200,000 subscribers who were not previously receiving Access service and therefore were not previously included in our subscription count, were included in a plan with additional services that included items such as extended computer protection, premium McAfee support, discounts on certain products as well as back-up dial-up Access.

This led to a lower year-over-year rate of decline in subscribers than we had seen in recent quarters. Absent the change, subscribers would have declined 20% which also represents improvements from the previous quarter and continues a well-established change. The change had an approximate 10% impact on total RPU which accounts for the slightly higher rate of decline in RPU than in recent quarters. Churn for the quarter was 2.2%, representing another year-over-year improvement as our tenured base matures and the value of bundled services offered to subscribers increases.

Turning now to expenses: in prior quarters our cost containment and efficiency efforts were obscured by increased operating expenses associated with acquisitions, incentive comp related to those acquisitions, and increased investment in Patch. In Q3 non-tax expenses declined sequentially by about $25 million, benefitting by reduced headcount as we constantly look for ways to be more efficient. The decline also reflects lower marketing costs following the consolidation of our marketing and communications organizations, the benefits from our India restructuring which we completed in Q2, and a reduction of miscellaneous expenses across a number of groups.

All of this, plus better-than-expected high-margin revenue, resulted in adjusted OIBDA of $87 million which was stronger than expected and up 14% sequentially from Q2. This is the first quarter of sequential growth in adjusted OIBDA in almost three years. As we move further into Q4 we expect to have another sequential improvement in adjusted OIBDA with a sequential improvement in ad sales offsetting a modest increase in expenses.

Finally, as you know, our Board of Directors authorized the company to repurchase up to $250 million of common stock on August 10th and since then we have repurchased approximately 9.7 million shares at an average price of $13.39, for $130 million in aggregate, bringing our shares outstanding to approximately 97 million shares. Clearly we believe in our opportunity, our strategy, and the asset value underlying both. Pro forma for our most recent stock purchases, at the end of October we had approximately $400 million of cash on hand and as you saw from our report this morning, we continued to efficiently convert adjusted OIBDA to free cash flow. We intend to remain opportunistic with respect to the rest of this authorization.

With that let me open it up to Q&A.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions.) Your first question comes from the line of Brian Pitz with UBS. Please proceed.

Brian Pitz – UBS

Congratulations on a nice growth in advertising this quarter. Tim, I know the overall strategy remains the same going forward but I was hoping you could give us an update on the progress you’ve seen in the sales organization under Ned Brody, and then I’ve got a follow-up. Thanks.

Tim Armstrong

Sure. As people remember we basically had changed the leadership in the sales organization to really focus on the operational efficiency and how we strengthen the opportunity. We put a big investment into the consumer products and ad products and now we really want to scale them operationally. There’s kind of been three big buckets of focus by Ned and I think they’re doing a really good job. The first focus is very clean and clear direction on each of the top 500 accounts we deal with, with a specific focus on the top 100 accounts. So I think from an operational standpoint we’re more focused and better-running across those accounts and we’re seeing the benefit from those now.

Number two is a real operational improvement in scaling some of the areas like Project Devil in video, in premium formats, and I think you’re seeing that in our results today as well so that’s going well. And then the third area, which is important, is how do we continue to structure the information data analytics and the kind of sales/marketing frontend of what we do. The top people in our industry are very good at insight and analytics; I think we’re doing a very good job of building those into the sales process infrastructure and getting that out to customers. So overall I think these results point to the fact that operationally these things are getting better, and Ned and the management team and sales leadership are working very hard on that and doing a very good job.

Brian Pitz – UBS

Great. And just on Patch, can you help us understand the level of investment during the quarter as well as any update on the more mature Patch sites – their sales trajectory or profitability. Thanks.

Tim Armstrong

Yeah, Patch overall I think spending is consistent with the expectations that we set against it. We have introduced during Q3 a new ad system, project Neopolitan, which we rolled out in August. We’ve seen growth from there and if you break Patch apart into two different areas, which we’ve talked about before, the consumer growth on Patch remains very strong – even from the Patches in 2009. We launched those, that growth remains strong on the consumer side and we continue to see a bigger opportunity to grow traffic there.

On the advertising front, the fact that we have basically gone from zero to 5000 advertisers shows the strong growth there. We’re continuing to move the amount of salespeople up there in general and I think we’re getting better operationally at sales, at the sales systems and improving the products and services. So I would continue to see us make progress against the Patch revenue and again, I think we’re on track for what we set at the AOL Board level in terms of the results we expected financially in terms of turning Patch into more of a profitability projection in a rolling thunder-type way.

Brian Pitz – UBS

Great, thank you very much.

Artie Minson

This is Artie, just to be clear Patch spending sequentially Q2 to Q3 was relatively consistent, so the $25 million expense reduction sequentially, none of that really came from Patch.

Brian Pitz – UBS

Thanks.

Operator

Your next question comes from the line of Mark Mahaney with Citi. Please proceed.

Mark Mahaney – Citi

Thanks. Two questions, please: first on the search side, could you just walk through broadly the options you have if you see kind of underperformance perhaps versus what Google is doing in terms of CPC trends? Are there potentials for make/hold provisions? How do you actually correct if you see something that suggests underperformance versus what you negotiated earlier this year? And then secondly just on the macro side, any material trends you’re seeing there? It looks like you saw improvement or acceleration or positive linearity during the quarter – is it a correct interpretation that you’re not seeing any major changes in end advertiser demand? Thank you.

Tim Armstrong

Quickly on the search side of the business, basically with Google our contract has very clear stipulations in terms of the products we receive and how we partner with them, and again there’s been a many-year partnership between the companies and a lot of communications. So when there’s discrepancies in what we feel like the performance of search are, our courses of action are one is just on the relationship side – we end up spending a lot of time with Google, going through detailed statistics and analysis of how it’s performing.

Two is we have a very detailed set of analytics around search ourselves across all of the different search properties that we have, and we measure those on a daily basis very closely. So I think we’re able to compare those versus Google results. In terms of recourses, on the contract I think one of the thing we’re discussing with Google right now is basically what are the discrepancies and the differences in the performance? What are the things contractually that we’re able to do with them within the contract to remedy those? And then number three is when you think about different product adoptions or different things coming out in search, what are the things that we can continue to improve and adopt with Google? I’ll just say that there’s a very high level of communication between the companies and again, our search performance overall has been positive from where it was but we want to be as good or better than Google is in terms of results.

Then second I would say on the macro trends, we’ve been out – actually Artie came with me down to a sales trip we did last week, and I’ve probably seen somewhere around 50 advertisers in the last month or two months who are doing 2012 upfront planning. I’ll just break it down to the following things: in the economy in 2008 people stopped planning. In 2009 people kind of gingerly came back to planning and what we were seeing in 2010 is advertisers learned the lesson that in 2008 it was a mistake to stop planning.

So even if the economy gets weaker I still think you’re going to see a macro trend where advertisers are going to shift dollars from traditional media to consumer digital media because that kind of migration has happened so quickly. So I would say in every single one of those meetings at least that I’ve been to customers are actively planning. Digital is a big part of their future and it ranges from customers trying to get down to fewer bigger partners and spend more, to customers trying to drastically… One of the customers we went to see is trying to triple their spend in digital next year so I think we’re seeing pretty strong macro trends. I can’t speak for advertising overall in all industries, but in digital there’s a high level of interest and a high level of planning going on.

Mark Mahaney – Citi

Thank you, Tim.

Operator

Your next question comes from the line of Ross Sandler with RBC Capital Markets. Please proceed.

Ross Sandler – RBC Capital Markets

Thanks, guys. Two quick questions, Tim: first on capital allocations. So the company’s back to generating solid free cash flow in the quarter and you’ve now used a little bit over half the buyback authorization, so can you just talk about the overall philosophy around what you’re going to do on the capital allocations side going forward? Can shareholders expect to see further share repurchases beyond the $250 million that’s authorized? And then Artie, on the cost structure, you guys have done a good job of reducing costs this quarter. Excluding the investments you’re making in Patch do you feel like the cost structure is where you want to see it right now, or is there more fixed costs you think you can take out? And I think you said OIBDA is going to be up sequentially but can you give us a little more color on order of magnitude for Q4? Thanks.

Tim Armstrong

I would just say on the resource use, I think we announced the $250 million buyback. If we feel like the price is right we will continue to execute that buyback program. I think you can see we are aggressive about it and we’ve felt the company has been undervalued, so I think you’ll continue to see us do that based on the valuation of the company.

In terms of where other cash use is going, I think you can summarize it very succinctly by saying it’s going to the places that are growing. So I think when you think about things like video, Project Devil, Patch – those areas that we feel like are a strategic use of the cash, we’ll continue to use those there. I would say we’re being very careful about any resource allocation and use; it’s something we spend a lot of time on, and I think if you look at our results from this quarter you can start to see us managing very clearly and succinctly the use of cash. And let me turn it over to Artie.

Artie Minson

Hey, Ross. On the cost structure side and on the free cash flow side, let me just point out on the free cash flow, absent Q1 which is the time when we pay bonuses and year-end commissions, I think what you see is a pretty standard conversion, meaningful conversion of adjusted OIBDA into free cash flow. So I just want to point out that that is ongoing and it’s just really the Q1 of each year we will have lower free cash flow conversions.

With respect to the cost structure side and what we can further do, the costs have been a way of life, cost management since we got to AOL. Just to level set we took $500 million out of the business in the first year and as I said, that’s been obscured a little bit of late by some of the acquisitions and retention comp, and investments in Patch of late. But I was really pleased that the whole company kind of rallied around our focus on costs in Q3 and a $25 million quarter-over-quarter reduction is obviously a pretty meaningful reduction for the company, and it frankly exceeded our internal expectations at the time we did the Q2 call.

As I said in my proactive remarks, we do expect a modest sequential uptick in expenses in Q4 and that really relates to Q4 is, from an advertising perspective, there’s just a lot of activity that goes on in Q4 so with increased activity comes an increase in expenses. I’m not going to really comment on the sequential uptick in OIBDA more than I’ve already commented. We did give a range for OIBDA on the last call and we are still within that range.

Ross Sandler – RBC Capital Markets

Great, thanks guys.

Operator

Your next question comes from the line of John Blackledge with Credit Suisse. Please proceed.

John Blackledge – Credit Suisse

Great, thank you. Two questions, one just on trends in domestic display – what drove the organic uplift in August and September and what was the trend in October? Was it similar or better organic growth? And then for Artie, the CAPEX run rate is lower than last year – it’s about 3% of total revenue. Should we expect that ratio to hold through the end of the year and going forward? Thank you.

Tim Armstrong

I would just say on the domestic display front, I want to point something out that I think is really important: we went through a very large change to the properties during Q2 as we integrated the Huffington Post. We changed a lot of our brands and I think part of the trends that you saw from us in the past have basically been because of that big shift. As a matter of fact, if you look at what we were able to do on the Advertising.com side with the growth – I mean we grew sold impressions 86% year-over-year on Ad.com, and you look at our domestic display results. I think if you look back on a pro forma basis there was a soft August but we feel like in general, as we kind of tailed up towards the end of August and continued through the quarter we saw the results get better.

And I would point to a couple of just quick factors. One is our team is getting better at selling the brands that we switched to as a company during Q2 and I think that trend is going to continue. The second thing is from us, as we changed the brands we also are changing the ad formats and changed to video and those things, and we’re seeing basically the benefits of that as we move forward. So I think as we get through the end of this year and into next year you’ll see domestic display improve, and I’m working very diligently on that in general. And I think a we kind of go forward we’re seeing October results, well let me put it this way – Q4 is a big quarter for us. We’re just starting November. October we were happy with but we still have two months to leg it out and make sure we do a good job with domestic display and the network and those things. So we’re happy with where we are right now but we want to continue to really focus and hustle.

Artie Minson

And John, on the CAPEX side, just like on the operating expense side we’ve been really focused on the capital side. It has gotten down, to your point, to about 3% of revenue. I do think it’ll probably stay in a range of probably 3% to 5% of revenue. As we look out there’s a couple of small projects on the horizon that could have it go to the higher end of that range in a particular quarter, but I think for the most part that 3% to 5% is probably in the zone of where we’re looking to manage things.

John Blackledge – Credit Suisse

Great, thank you.

Operator

Your next question comes from the line of Ben Schachter with Macquarie. Please proceed.

Ben Schachter – Macquarie Capital

Hi guys, a few quick ones. One, Artie, just any more detail you can give on that SG&A line coming off so much, sort of really helping us understand exactly how this came down and is that the new baseline going forward? And then Tim, two questions: one, mobile, can you just kind of talk about what are the strategic goals there and also how do you maintain search share in mobile? And then just finally on display, you’re seeing a lot more industry-wide focus on data optimization and better targeting – any thoughts there on what AOL can do? Thanks.

Artie Minson

Hey Ben, it’s Artie. Let me hit the SG&A stuff first. It was really across the board, and as I said in my proactive remarks it related to everything from marketing to B&E to consulting to starting to get the benefits of things like the India restructuring to frankly in some areas we had some headcount reductions to make ourselves more efficient. So to answer your specific question I think some of it is going to be obviously permanent reductions; some of it you’ll probably see in a particular quarter – to the extent we invest in certain areas that line will come back up a bit.

I think as I said, Q3 to Q4 I do think you’re going to see a modest tick up in that line, and that has to do with just activity levels. But look, we continue to be really focused on expenses and I think you’re starting to see the absence of noise in the system with expenses and you’re starting to see just how focused we’ve been on trying to manage that SG&A line, as well as cost of revenues which frankly also came down sequentially quarter-over-quarter.

Tim Armstrong

So on mobile, let me just hit a couple real important points. One is, and I’ve been saying this all year, is we’re very focused on the user traffic growth of mobile. We stated last year we were going to be focused on video monetization and this year we would start to integrate mobile monetization. So in terms of mobile usage we are doing a couple big things. One is we’re very focused on building apps for all the major brands and continue to roll those out as you’ve seen.

Second is continuing to build mobile sites around the big properties as well. One of the things I mentioned on the call is we launched the Huffington Post mobile site which has been big and has helped grow traffic there. So you’re going to see us continue to invest in mobile experiences for consumers that matter, and we just integrated mobile into the core ad system so you will continue to see mobile ad growth with us as we recently have just gotten from a technology standpoint that integrated, and that will continue to scale.

On the search side of mobile, a couple of key comments there: one is we’re, I’m not going to go into a lot of detail on it but AOL.com remains an important property for us both on mobile and on the web. That drives a lot of the search activity so we’re working on mobile AOL.com. And then second of all, I would say from a search perspective that we’re doing a much better job of integrating a core search experience across all of our properties and that’s been a multi-year project for us but we’re seeing results in that, and mobile is included in that.

So I think mobile search share comes down to how well we do on the mobile consumer side of things and we’re very focused on it. We have a centralized group of mobile folks in Palo Alto and in Dulles and we do mobile engineering across the world now so those are the two kind of main areas underneath mobile usage and search. We’re putting a bigger and bigger investment into that and I think you’ll see us come out with more mobile products and better mobile products as we move forward. I would point out things like InGadget and [Dissero], some of those things are very good products – if you haven’t signed up for them you should. And they’re doing very well.

Operator

Your next question comes from the line of Youssef Squali with Jefferies. Please proceed.

Youssef Squali – Jefferies & Company

Thank you very much, two questions please. Artie, starting with you, can you go over those pro forma growth numbers for display again if you could? I think you talked about July and August being up 6% - what was it in Q2? And are we basically assuming that there should be acceleration going into Q4 based on your comments about October? And then on the Access side, domestic ads were up about 200,000 – I’m assuming this is a one-time event but is there more happening in Q4? And given the price hike do you expect maybe a pickup in churn in Q4 as some of these customers see the new price increase on their credit card bill? Thanks.

Artie Minson

Hey Youssef, it’s Artie – let me hit those for you. I’ll hit the Access stuff first. I think as we laid out at Investor Day pretty well, we really changed the value proposition around subscription from one of dial-up to one that people are getting various different pockets of value and different services from what they get in subscription. So depending on your service you may be getting things like LifeLock bundled in; you may be getting a McAfee suite extended, over $1000 of computer protection, etc. So we cleaned all of our pricing up really during Q3; it’s essentially done. We kind of focused on about six major price points and the customer reaction has been very, very strong, very positive. It was an easy opt-out if people chose to opt-out and I think what people are starting to really see is the value in the service well beyond dial-up.

There’s always a chance you can see a modest uptick in churn but overall we’re very pleased with what we saw so far. I do want to just have one clean-up item: when I talked about the RPU impact on subscription RPU from the change from the 200,000 subs, that’s a $0.10 change. Eoin handed me a note that people may have heard me say 10% so that was a $0.10 change.

Turning to pro forma display, just to walk you through that – in June and July what we had seen was basically those months were flat. August and September on a combined basis, pro forma had been plus 6%. We’re just closing out October where we did see growth again, but as far as Q4 so much of the quarter frankly depends on what we see in November and December. It’s still early days in the quarter and I think probably too early just to call out how the entire quarter is going to be in terms of a range. But we were certainly encouraged by what we saw at the end of Q3 and the beginning of Q4.

Youssef Squali – Jefferies & Company

Thank you.

Operator

Your next question comes from the line of Ingrid Chung with Goldman Sachs. Please proceed.

Ingrid Chung – Goldman Sachs

Thanks, good morning. A couple of questions: first on Yahoo’s call they said they saw a shift in premium display away from non-premium. I was wondering are you seeing something quite different from that? And then secondly, I was wondering if you could give us a little more detail on Patch. Are you planning on being at 1000 patches by the year end and Tim, I think you said at our conference that 2011 would be the peak year in terms of spend for Patch. Do you see the spend for ’12 being materially lower than ’11? Thanks.

Tim Armstrong

Sure, thanks Ingrid. So I’m not 1000% familiar with what Yahoo said individually about premium display but in our business right now, I think we should talk about two things here: one is we are seeing very heavy interest from advertisers. In looking at brand advertising solutions, a lot of the customers have spent a lot of time and energy on kind of a lower marketing funnel online and they’re starting to realize that brand consideration is a big focus. I talked to one of the CEOs of the major restaurant chains in the US late last night and their major challenge is not getting people to use more coupons coming to their store; their major challenge is to get people to understand why there should be a brand consideration choice for their brand. So I think we see a high level of interest in that.

I think we’re also seeing a high level of interest in customer acquisition on Advertising.com and we have real strength there, so I actually think we’re positioned well in both marketplaces. Our premium display results, with the integration we did with Huffington Post and all the changes to the properties, I’m probably not in a position where I would say they’re going to be next year; because when we make that big of a change to the company even though there’s a very high level of premium display interest, making sure we work those changes through the sales force which we’ve done a good job of, I think we’ll be able to capture more and more of that interest next year. So in our results you see the Advertising.com business very strong. I think you see the display business being strong but the display business, if we were kind of twelve months from now looking backwards, I think you’d see it be even stronger in terms of what we’re doing.

And then on Patch, we’re working our way towards 1000 patches. We’re not expanding really quickly right now because we just rolled out a new set of monetization products and services, and we’re working very diligently and also on the consumer-side products and services. So you’ll see us continue to expand up to 1000 patches as we work through the revenue products and consumer products, through those areas; and timeframe wise, I think we’re kind of continuing to expand now but not as rapidly as we did at the beginning of the year.

And then second of all on the cost side of Patch, I did mention at your conference that 2011 was going to be kind of a high water mark for cost. That high water mark is going to come because of revenue expansion and then also us continuing to make Patch more efficient from a cost perspective as we go forward. I would just underline and say both from an advertising perspective as well as an external publishing partner perspective, Patch has a lot of interest in the marketplace and we’re managing the costs very closely. We’re watching them very closely, we’re watching the revenue products very closely and the sales force closely, but we continue to be very excited about Patch overall; and from an investment standpoint we think it’s a very good investment.

Ingrid Chung – Goldman Sachs

Alright, great. Thanks.

Operator

Your next question comes from the line of Peter Stabler with Wells Fargo Securities. Please proceed.

Peter Stabler – Wells Fargo Securities

Good morning, thanks very much for taking the questions. Back to the Patch, you mentioned 5000 advertisers onboard at this point. Can you characterize a split there? Are these overwhelmingly small, local advertisers? Are you getting an super-regional or national interest at this point? And then I’ve got a quick follow-up, thanks.

Tim Armstrong

Yeah, so one thing that’s really important to note here is almost similar to the mobile conversation we had earlier: we basically said at the beginning of the year we’re going to focus on consumer growth of patch and then follow up with monetization. We’re very deep in the monetization focus, so Peter, if you break the revenue down of Patch, the vast, vast, vast majority – 90% plus roughly is coming in and has historically been local-local.

There’s three areas of advertising we’re going after: national, regional and local – I call it “local-local” because it’s in-town. On the local-local side we’ve seen that’s where a vast majority of the growth has been and revenue has been. That’s frankly the only place we were focused on at the beginning of the year, so it was basically 100% almost at the beginning of the year and we’ve continued to work that other places into the mix. On the regional side, we’re just getting the regional sales force and focus off the ground right now; and then on the national side, there is extreme interest in national.

And the reason is, and this is the reason we’re doing Patch from the monetization side, is when you go talk to the major spenders of advertising in the United States – the car companies, half of their budget is spent regionally or locally. If you talk to the major big box retailers, they have hundreds of millions of dollars invested in their local locations. On average, the patches we’re in have about a 90% crossover with the national advertiser locations where the vast, vast majority of their commerce is done.

So I think what you should expect in 2012 is very clear progress on the national side; we expect very clear progress on the regional side, and you should expect continued scale progress on the local side. But by the end of this year we’ll be over 10% from national and regional and I’d expect that percentage to expand rapidly.

Peter Stabler – Wells Fargo Securities

Great, thanks for the color – very helpful. And then quickly on the video side, would you say that the great scaling in video consumption and then ad unit purchases, is that opening up new categories of advertisers or is this just selling deeper into your existing client base?

Tim Armstrong

It’s doing both, actually. So one is it’s allowing us to use video to target new types of advertisers, and we’ve for instance ramped up an inside sales team which is selling video now. And I would say the thing that people should recognize underneath the video landscape and the industry, if you look back 12 months ago or 18 months ago on video as an industry to where it is today – the targeting ability of video, both on video to connect people to commerce, to local, to social… On video itself has improved pretty dramatically. So I think what video was a few years ago on the internet was kind of repurposed video ads from television, and it’s very quickly migrating into a much more interactive and engaging experience. So that’s number one.

And then number two is we’re actually leveraging video, not just video alone but video inside of Project Devil as well, so we’re seeing very good video results from mixing Devil together. So I think there’s a growth in advertisers, I think there’s a growth in terms of how advertisers are actually using the formats; and then for us specifically, I don’t see a lot of other people doing this. There’s opportunity and we’re seeing this from mixing video into our larger formats. From turning advertising into content we’re able to use video for a broader scope, so I think that’s where you’re seeing the video scale coming from.

Peter Stabler – Wells Fargo Securities

Thanks very much.

Operator

Your next question comes from the line of Anthony DiClemente with Barclays Capital. Please proceed.

Anthony DiClemente – Barclays Capital

Thanks for having me on the call. Just a question for Tim: in my own mind I’m trying to get a sense for where Facebook fits in in terms of display, and there’s debate about premium versus non-premium – I think another caller asked about that from the perspective of Yahoo. But you’ve mentioned a couple anecdotes from your conversations with high-level advertisers, CEOs or CMOs at the ad buyers, and I just wonder can you talk broadly about this behemoth Facebook? Is this something you see as a competitor to your business? In what ways is it a competitor and in what ways is social display not a competitor, and how should we think about it? Thanks a lot.

Tim Armstrong

Sure. So at the end of the day, our competitive set is anybody that’s trying to help customers get more revenue and individual endemic customer growth in their businesses. So I think we look at all people in the online space as our competitors to one degree, and there’s co-opportition as well. But so we take that seriously, number one; and number two is we benchmark ourselves against what products are in the marketplace and what products we have.

I’m not going to go into super detail around Facebook. Facebook has obviously gotten a lot of momentum from the usage standpoint. Without commenting on Facebook specifically, and I’ve met with CEOs and CMOs, a lot of them in the last couple months, and here’s the feedback I hear from advertisers; and I believe this to be truisms across the agency and client landscape. Number one: people are going with fewer bigger partners, so that benefits the Facebooks of the world, the AOLs of the world, the Googles of the world.

That is happening; customers are trying to spend more money on fewer properties. One of the largest buyers in the United States was in our New York office and I was meeting with him, and he basically said they’re expecting the top ten or top twenty players on the web to essentially mimic the cable world over the next couple years, and that’s where they want to spend their dollars – so the top twenty properties.

Second thing is, this does not just apply to some of the companies I’ve already mentioned but it’s everybody: the real question on the advertising competition side is “What are you buying?” So there are cases where advertisers have spent a lot of money in the past couple years on big programs where they got what I would call a Level 1 outcome – where they got an initial outcome. But if you can’t follow that all the way through to sales, revenue growth and brand differentiation, you’re going to have issues.

So from our standpoint, where we see the opportunities for us to grow very quickly is with the products and services we have and the properties we have, we feel like we cannot just get order of magnitude one results; but get magnitude two and three results for customers all the way through the chain. So for instance, if you look at a lot of the stuff we’re doing in the advertising business, our results on engagement, on follow-through metrics – we’re starting to really push commerce inside our units, those things – we want to continue to move people all the way through the food chain. The second thing we’re doing, which is very strategic with Patch, is we want to get people to parking lots.

You know, our advertising business which is differentiated from the other competitors on the online space, is we are good at doing three things: brand consideration – should you choose Coke or Pepsi; in-market ad targeting with data and scale – how do you find the people who are in-market currently doing that; and then number three which is very differentiated – how do you get people to parking lots? One of the major retailers we met with two weeks ago does about $40 billion in offline sales and they do $1.5 billon online. Helping them move hundreds of millions of dollars into their stores for commerce is a very key attribute of what we bring to the table.

So we want to hit those three nails for revenue. I think the other big players are innovating and moving quickly but I want to be very clear about this. In a very Art of War way, AOL is building our advertising and content properties very specifically to do brand consideration and market targeting, and getting people to parking lots because it matters a lot for these businesses. Facebook, well I won’t go into details on. You can call the CMOs we’ve met with and I think you’d hear a very defined story.

Anthony DiClemente – Barclays Capital

Thanks a lot.

Operator

Your next question comes from the line of David Joyce with Miller Tabak & Company. Please proceed.

David Joyce – Miller Tabak & Co.

Thanks. If you could just provide a little color on what could be going on in your Patch markets. There’s been traditional media companies trying to get more into the online space to extend their brands. I’m just wondering what kind of competition are you seeing there or if you had more of a first mover advantage because of the hyper-local approach. And then secondly, if you could just talk a little bit more about content could grow and help feed into the rest of your strategy. Thanks.

Tim Armstrong

Sure. So on Patch and basically what the Patch marketplace is, first of all we’re partnering with a lot of the companies in the local space and people in the local space to continue to drive outcomes and better experiences for consumers. The competitive space locally comes down to there’s a set of traditional companies, there is a set of typically blogs or blog networks; and I think that competitive advantage that we bring and the partnership advantage that we bring is the ability to do very scaled, structured data. We bring advertising systems of scale that are very simple to use and we bring the ability to put up a lot of content.

Patch ends up putting up a lot of content. We measure that very closely – individual patches, how much content’s getting put up; what’s the content about. And then speed is a critical factor. I get a lot of patch updates and we watch them closely about how fast we break news and those things, so that’s a huge benefit. The second thing is giving people the tools and resources and communities to put content up themselves. A big focus, a big percentage of our events and those things are starting to come from users there, so I think on that competitive front Patch is basically a more open platform that allows people to more one, get information, but also interact there. And we’re seeing a huge growth in comments, a huge growth in uploads, those things, so that’s a huge benefit.

I would also just say that in the competitive landscape every single individual cohort, and we measure individual patches – we also measure the dates we’ve launched them. Every single cohort across Patch is growing. So from a competitive landscape we’re able to continue to grow even in the face of what the current competition is in general there, that’s one. And then second of all we’ve done a very good job of feeding the content system at AOL on it. Content goes up to national stories and comes down to localized stories – I think it’s been a lot of work with the Huffington Post there, it’s a lot of work with some of the other properties.

Patch gets noticed by a lot of people. Barak Obama tweeted about it yesterday, a Patch story, so I think we’re seeing Patch… I mean some of the governors, we’ve actually run into a lot of the politicians across the US also and one of the things that’s happening is they’re starting to aggregate local patch stories to find out what’s happening in their state. A lot of the government officials in Washington and across the country basically get daily Patch reports to kind of keep abreast of what’s happening in their communities. So I think we’re building up a very good ecosystem of content locally, nationally, and we’re really headed to be probably the largest producer of content on a local and national basis every day, and we’re looking at ways of optimizing those.

David Joyce – Miller Tabak & Co.

Great, thank you.

Operator

Your next question comes from the line of Sameet Sinha with B. Riley. Please proceed.

Sameet Sinha – B. Riley & Co.

Yes, thank you. Tim, as you said, you and Artie were out meeting with some of your largest customers talking about 2012. Was it something they said, anything about priorities for 2012 that you think is missing from your current product/service set that you would like to change, either through in-house or acquisition or partnering? That was the first one, and the second one, in terms of video advertising, basically I’m talking about monetizing the videos that you have on various AOL properties. Are you doing it through your direct ad sales or are you doing most of it through Advertising.com and how do you see that trending over the next twelve months? Thank you.

Tim Armstrong

Sure. So the areas that we’re interested in going forward, I don’t think there’s going to be any major acquisitions here because I think we’re doing a very good job of organically growing these. When you talk to customers, what customers are very interested in is they’re interested in more coherent metrics. They’re interested in acquisition metrics, so on the first one I would say brand consideration metrics. They’re interested in acquisition metrics and scale there, and really just in how they connect local into the mix. So I think we’re putting organic investments into each of those areas.

I would say the areas where we’re focused on and where we think there’s opportunities where the customers want also – one is social, so we’re continuing to put social further into our ad products and that was part of the reason for the Huffington Post acquisition. We see some big opportunities there. We have a new product coming out for advertisers around social which I won’t go into but we’ll be launching. The second piece is around commerce. We’re getting smarter and smarter about how to mix commerce into the advertising business, and customers are very interested in that so I think those are the big areas.

In terms of video, the ways we’re selling video right now first and foremost is with our own sales team. You’ve seen the results we’ve put on Advertising.com; we have similarly-structured our video sales and sales force to basically work with our larger ad sales force and then also specialize in certain video ROI and products. So I think we’ll see more and more sales coming through that channel. Second of all is we are partnering with branded entertainment companies and we’ve seen nice video growth in terms of brands and usage from the branded entertainment category and we’re going to continue to do that.

And then we have a third category I’m not going to go into but we have a third category of video that we’re working on and will be launching which we’re interested in. Part of that are things like integrating local and other things, which we’ve had some really good results recently by some of the targeting we’ve been able to do in terms of how the new formats, the new ability to target video are happening.

Sameet Sinha – B. Riley & Co.

Thank you.

Tim Armstrong

And I think we have time for one more question.

Operator

Your final question comes from the line of Ken Sena with Evercore. Please proceed.

Ken Sena – Evercore Partners

Hi, thank you. Can we just go back to usage for a moment? You talked about the growth with Huffington Post in terms of the traffic, but if you look at the overall sort of unique trends it looks like you’re still trending very flat. So can you maybe just give us a sense of how, what are the puts and takes there and how that mix is changing? Thanks.

Tim Armstrong

Sure. So usage is everything we’re doing at the company. We have this top box priority we use to prioritize everything in the company; everything ladders up to revenue and traffic growth. On the traffic growth side of things, when you break the traffic growth down you basically have a natural tail down in some traffic from the Access users. Overall when you go inside of traffic and start splitting it apart, what you see is you see there are usage areas which have been declining so there’s some areas like MapQuest and AIM which have gone down a little bit; and then there’s a number of areas that have gone up in terms of usage. And when you balance all those things together you end up with traffic that’s slightly up year-over-year.

So I would comment on the following things so people are really clear about it. One is traffic growth is a top box item for us. Second of all is some of the products that were declining at AOL and having big problems like AOL.com are now starting to get better from page views and traffic usage. And then three is, as I talked about with our kind of 80-80-80’s strategy, we are starting to invest very heavily in the areas where we believe the future business models are going for traffic.

So for next year’s goals for 2012 we would like to have traffic go up meaningfully. We’re focused on the areas that are going to have meaningful outcomes for us as a business but when you look through some of the sub-metrics I brought up earlier, the Huffington Post growth, Patch growth, the video growth – those are the things. You’re actually seeing very strong growth in the areas where we believe the future of our business is in, and then even in some of the areas that have tailed down we’re going to be announcing some products there which hopefully will help moderate or help us get back to growth.

But the overall traffic (inaudible) slightly up doesn’t get us excited and probably doesn’t get you really excited, but we’re excited about the core under things where we’re focused, and I would hope next year we’re going to have more traffic growth on a more meaningful scale.

Ken Sena – Evercore Partners

Thank you.

Tim Armstrong

So just in final wrap-up for the call, I just want to reiterate the things that we feel strongly about: closing the gap on the inflection point of total revenue growth – that’s going to happen before profit growth really kicks off and starts growing. The second thing is running AOL efficiently. There has been a lot of noise around the company but internally the company is operationalized at a very transparent level with a lot of data and metrics. And number three is we’ve positioned the asset people and strategy against what we think the big opportunities are. We’re taking it very seriously.

We see very serious opportunities in the marketplace that we want to continue to grow, and in fact, I think we did a very good job of shrinking the equity in the company at a very good cost for shareholders and that was a big strategic move for us. We remain very enthusiastic about where the company’s going, where the brands are going, and you will see us consolidate the structure and strategy down to more meaningful pieces and really turbocharge those for next year.

So we appreciate the investor interest, we appreciate the investors that have been staying with us as we continue along the comeback for AOL. And we’ll see you next quarter.

Operator

Thank you for joining today’s conference. That concludes the presentation. You may now disconnect and have a wonderful day.

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